The investment forecast for 2023 might have just gotten a little rosier, as one major investment firm is now estimating returns for a 60/40 portfolio at 7.2%

In its annual publication, Long-Term Capital Market Assumptions, New York-based J.P. Morgan Asset Management forecast U.S. equities in 2023 to provide a return of 7.9%, fixed income 4.6% and private equity and real estate roughly 10% each.

“From our current vantage point, the view has improved. We see much higher forward-looking returns across major asset classes as well as a broad return to more traditional valuation relationships,” said Jared Gross, head of institutional portfolio strategy, during a virtual panel tied to the release of the forecast, which has been named “Back to Basics.”

“Put simply, what used to work, but then stopped working, is now likely to work again,” he said. “Diversified market portfolios can provide returns, active management can deliver enhanced performance, and private alternatives can deliver unique sources of alpha inflation protection and diversification.”

According to the investment firm, the forecasts have been released annually for the last 27 years, and 70% of the time they’ve come within one-half of one standard deviation of the markets’ actual performance.

“It's important to add that we don't go through this exercise out of purely academic interest or just because it's helpful to our clients. We put these insights to work across our portfolios, most directly in our multi-asset solutions business, where we manage against strategic benchmarks that are directly informed by these LTCMAs,” Gross said. “And that's really just a fancy way of saying that we eat our own cooking.”

Joining Gross were John Bilton, head of global multi-asset strategy, Danielle Hines, associate direct of U.S. equity research, David Lebovitz, global market strategist, and Lisa Coleman, head of the global investment grade corporate credit team.

To Bilton, the silver lining of 2022 is that, from now moving forward, asset markets are back on their familiar path, as evidenced by the jump in the 60/40 return from 4.2% this year to the forecast 7.2% next year.

“One thing that may surprise some folks is that while we've got expected returns up across the board, what we haven't seen is that much of a change in the long run on U.S. inflation or indeed global inflation,” he said, adding that he expects inflation will cool slowly over the next couple of years.

Another bright spot, he said, is the experience advisors will now have where even the most conservative portfolios today will offer more return than the most aggressive in the last year.

“So even after a difficult year, those of you who are still concerned that we may have some problems ahead of us are still able to build returns while derisking at the same time,” Bilton said. “Truly, investors today have choices that were not on the table a year ago.”

On the macro level, all the economic influences that advisors have been contemplating this year will continue to be a presence—the war in Ukraine, the pandemic-related supply chain hiccups, the hawkish Fed, slow growth and persistent inflation, a possible recession, a reconfiguration of trade relationships and deglobalization, Lebovitz said.

“To me, there are really two key things to take away from the macro forecasts. One, this is no longer about a world which is going to be characterized by very low rates of inflation and free money. We don't think inflation is going to be a long-term issue, but we recognize that it is not going to dissipate in the course of the next couple of weeks or months,” he said. “And at the same time, these higher interest rates that we do foresee over the forecast horizon are going to lead to more competition for capital. We think that that's going to create winners and losers across the markets, and set up a better environment for active managers going forward.”

Focusing on fixed income, Coleman said she forecasts U.S. high-yield at 6.8% next year, and investment grade at 5.5%. Meanwhile, 10-year bond yield could be 4%, and 20-year-plus yields 4.2%.

“I would agree with our long-term forecasts that government bond yields do look attractive and, in fact, we've been edging higher in duration across our portfolios,” she said, adding that she anticipates the Fed may now slow its tightening going forward. “So perhaps next month we would see 50 basis points instead of what was originally expected to be 75 basis points of increase, and then perhaps one more hike of 25 basis points. Now, what's important about that is this gets us to a terminal rate for the Fed around 4.75%.”

And in the equities world, Hines said while the U.S. large-cap returns, forecast at 7.9%, are great compared to 2022, other regions are expected to do even better. “We're expecting double-digit returns on an annualized basis in areas like Europe, Japan, China, Brazil, just to give you some examples,” she said.

Hines said that when forecasting equities, the J.P. Morgan team looks at revenues, margins and capital return on a bottom-up basis, company by company.

“It’s these insights that really help to shape our long-term view of earning and valuations,” she said, adding that one area that is dragging down long-term expectations is margins. “Despite rising labor and rising input costs, corporate margins have remained elevated and are very close to peak levels as companies in some sectors have really been able to enjoy a nice amount of pricing power for sometimes the first time in several years, or even a decade. We do expect margins to recede from here, and we do think that that will create a headwind to equity market returns.”

And finally, Lebovitz assessed the alternatives universe as coming into its own, not just for return but for more meaningful diversification in the equities-bonds relationship.

“Alternatives are transitioning from optional to essential. There is an important role for alternatives to play within the context of a diversified portfolio,” he said.

Real estate, which stabilized portfolios in 2022 should continue to do the same in 2023, while private equity, private debt and venture capital could see returns of 9.9%, 7.8% and 8.5%, the report said.